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The Harriman Institute Forum

Volume 3, Number 12
December 1990

Padma Desai, "Soviet Economic Reform"

500 Days: Shatalin at Columbia

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TH HARRIMAN ISTTUTG

Volume 3, Number 12

F URUIT]

December 1990

Soviet Economic Reform: A Tale of Two
Plans

by Padma Desai

Two caveats need to be entered. First, this essay is an effort at interpretation: the two plan documents compared in it
are at times characterized by ambiguity, reflecting perhaps the traditional political art of seeking consensus by semantic
obfuscation. Second, the Soviet situation remains highly volatile. Originally a comparison of the (now-defunct) Ryzhkov
planand that of Shatalin, the essay was quickly rewritten to compare the Shatalin and Gorbachev plans. But, no matter
what cataclysmic political and economic events overtake the Soviet scene, the dramatic confrontation and interplay of
the Shatalin and Gorbachev plans will shape the course of Soviet economic reform. This, and the widespread but rather
hasty presumption that the Shatalin plan was superbly crafted and the Gorbachev plan was a compromise anda calamity,

are reasons enough to write this essay.

Introduction

The Shatalin plan and the Gorbachev plan have for now
emerged as the final contenders in the pellmell process
of "planomania" on the Soviet scene.

The former, clearly inspired by the original 500-day
plan of Boris Yeltsin, was put together by a joint team of
advisors to Gorbachev and Yeltsin under the guidance of
Stanislav Shatalin, a member of Gorbachev’s Presiden-
tial Council. It has been approved by the Supreme Soviet
of the Russian republic with one dissenting vote. On the
other hand, the Gorbachev plan, which eliminates in
essence the drastic timetable of the Shatalin plan, sur-
faced as the Presidential choice among more and less
radical alternatives. It was accepted by the Supreme
Soviet on 19 October 1990 with an overwhelming vote.

The stage is now set for approval of either plan by the
republics (except for the Baltic and Russian republics
which have already voted in favor of the Shatalin plan).
Whatever the outcome, the critical phase of transition to
markets in the Soviet economy has begun.

In their acceptance of markets, both plans represent a
decisive ideological break from the Stalinist planned
system. In their proposed rearrangement of the union-
republic” relationship, both aim at ultimately reshaping
the Soviet Union cemented as a monolithic unit under
Stalin. They acknowledge that the old order of an ad-
ministered economy and a centralized state has failed.
But more than that, they are both inspired by a
philosophical tradition alien to Marxism-Leninism; the
voices that one hears belong to Adam Smith and Joseph
Schumpeter. Thus, the Shatalin plan declares: "Mankind
has not managed to create anything more efficient than a
market economy." (The Transition, p. 14). Note the equal-

The citations below refer to the Shatalin plan as The Transition and to the Gorbachev plan as Basic Guidelines, in keeping with their titles,
respectively, The Transition to the Market, Part 1, Conception and Program, prepared by the Working Group formed under a joint decision of M.S.
Gorbachev and B.N. Yeltsin, Moscow, August 1990, and Basic Guidelines for Stabilization of the National Economy and Transition to a Market Economy,
Moscow, 16 October 1990. The page references are to the English translations of these two documents, to facilitate wider access to the original

lans.
n this essay, the center is referred to as the "union" whereas "state" refers to either the union or the republic.

THE W. AVERELL HARRIMAN INSTITUTE FOR ADVANCED STUDY OF THE SOVIET UNION
COLUMBIA UNIVERSITY - 420 West 118th Street - 12th Floor +» New York, New York 10027

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ly ringing endorsement in the Gorbachev document:
"There is no alternative but to switch to a market. Ex-
perience the world over has shown the viability and
effectiveness of the market economy." (Basic
Guidelines, p. 1). The rough and tumble of the markets
and innovative entrepreneurship are the proclaimed goals
of both plans. But these common features of the two plans
yield to serious dissimilarities elsewhere.

Two differences stand out and provide the framework
for the analysis offered below.

The first relates to the contrasting conception of union-
republic relations, and the division of rights and respon-
sibilities that follows. The Shatalin plan, reflecting its
origin in (and compromise with) the Yeltsin plan, works
from the autonomy of the republics to the surrender of
powers to the Soviet Union, while the Gorbachev plan,
despite many similarities, is conceptually derived the
other way around: from the union’s primacy to surrender

of powers to the republics. The giveaway is the Shatalin ©

plan’s frequent focus on the republics where the Gor-
bachev plan looks to the union.” Key differences derive
from this contrast, raising questions about the extent of
republic autonomy and the related issue of how the role
of the government (whether republic or union) is en-
visaged in the ultimate "steady state" of a market
economy to which transition is sought.

The second difference relates to the 500-day timetable
of the Shatalin plan and the absence of a Procrustean
time frame in the Gorbachev plan. God created the world
in seven days. The Shatalin plan allows for 500 days but
faces a far more difficult agenda. Its demanding schedule
also necessitates a clearer specification of the sequencing
of different components of the reform program than is to
be found in the Gorbachev plan. The absence of a strict
timetable in the latter may be explained in various ways.

For instance, it might be suggested that, since both plans
have many common features, Gorbachev was keen to put
his stamp on the final plan by removing the 500-day
feature popularly associated with Yeltsin.’ Alternative-
ly, the dropping of the S00-day timetable and, with it, the
Shatalin plan, may reflect Gorbachev’s attempt to resolve
the paralysis in which he found himself in September
1990. By that time, a political deadlock had engulfed
central decisionmaking. Yeltsin, armed with almost
unanimous approval of the Shatalin plan by his legis-

lators, had signaled with characteristic flamboyance his
disapproval of the alternative Ryzhkov plan, then under
consideration by the USSR Supreme Soviet, saying:
"One cannot combine a hedgehog with a snake.” The
slow-speed Ryzhkov plan was the hedgehog, the fast-
track Shatalin plan, reflecting Yeltsin’s views, the snake.
(The metaphor’s additional implications seem to have
eluded Yeltsin.) Prime Minister Ryzhkov, on his part,
threatened to resign if the Shatalin plan was accepted.
The central legislators were hardly enthusiastic about the
Shatalin document; in their view, its frontal attack on the
status quo would accentuate rather than ameliorate the
growing disintegration of central authority and economic
chaos. While Gorbachev had extracted emergency
powers from the Supreme Soviet (on September 24,
1990), he was in the predicament of not having an agreed-
upon plan to implement with these powers. The com-
promise Gorbachev plan was evidently aimed at
placating Ryzhkov and the legislators who, in fact,
adopted it on 19 October 1990. (However, the strategy
did not work in pulling on board the supporters of the
Shatalin plan, nor Yeltsin and the Russian republic
which, as late as 16 November 1990, had refused to
implement directives issued by the union under
Gorbachev’s emergency powers.)

Political considerations apart, the following analysis
argues that, on purely economic grounds, the Shatalin
plan’s 500-day time frame and its specifics on republic-
union economic relations were ill-crafted. Gorbachev’s
rejection of the Shatalin plan on these grounds was pru-
dent and reasonable. The Gorbachev plan nonetheless
suffers from serious shortcomings in its transitional
strategy and needs to be modified to make it more effec-
tive as a roadmap to a market-based Soviet economy.

How Much Republic Autonomy?
How Much Government?

The two plans have critical differences concerning the
conceptualization of union-republic division of rights
and obligations. At the very outset, however, it is neces-
sary to underline the common theme of both plans in this
regard.

hatalin has suggested in private

3 In consonance with the Basic Guidelines document, Gorbachev's frequent pronouncements refer to "our country.’
4 In fact, the absence of the 500 days may exaggerate the differences between the Gorbachev and Shatalin plans.

conversations that the 500-day timetable is not set in cement. And Gorbachev's recent decrees on price reform appear to be following the
e fast-track schedule of the Shatalin plan anyway.

ep pane y
These modifications are advanced at the end of this essay and reflect the analysis in Chapter 10, "Perestroika: Retrospect and Prospect,” of the

paperback edition of my Perestroika in Perspective: The Design and Dilemmas of Soviet Reform, Princeton University Press, 1990. Their key features
derive from the "Desai Plan" in an article detailing the major plans for Soviet reform in The International Economy, October / November 1990.

Common Themes

They agree that currently excessive governmental
authority is centered in Moscow and that there is too
much of it at all levels. Therefore, both plans call for the
devolution of substantial political (and economic) power
to the republics and for a massive shift to functioning
markets.

The Shatalin plan states, and the Gorbachev plan does
not disagree, that sovereign republics will implement
individually the agenda of transforming hitherto-unitary
political, social, and economic structures. The plan en-
dorses economic integration of the republics but em-
phasizes that it will be based "exclusively on mutual
interest and equal partnership." (The Transition, p. 17).
An inter-republican committee, to be set up under the
auspices of the union President, will have "full powers to
exercise efficient and flexible control over the reform
process." (The Transition, p. 31). In the Gorbachev plan,
sovereign republics derive the material basis of their
sovereignty from the resources located in their territory;
they can regulate the possession, use, and disposal of
these resources via legislation. They are responsible for
developing their territories. Moreover, "each sovereign
republic can enact and implement legislation to achieve
the transition to a market economy taking account of its
socioeconomic condition, local features and history."
(Basic Guidelines, p.3). However, while the republics are
sovereign and equal, the integrity of the union as a
federation must be preserved. The union and the
republics must coordinate their activities during the tran-
sition to markets.

Along with this agenda, a Western-style market
economy is envisaged by both plans. According to the
Gorbachev plan, "the enterprise is the basis of the
economy and the state is responsible for creating a
favorable environment for its activity." (Basic
Guidelines, p. 3). Again, "competition among producers
is vital for stimulating economic activity, increasing
product diversity, improving output quality, lowering
costs and stabilizing prices." (Basic Guidelines, p. 2).
Except in a few items, prices must ultimately result from
the free interaction of supply and demand. Among the
few areas of nonmarket activity are defense, health care,
education, science, and culture where "commercial
criteria" cannot be applied (Basic Guidelines, p. 2). Fur-
thermore, while state regulation of the economy will be
conducted by the republics and union according to the

Padma Desai

division of functions under either plan, the two plans
agree that direct controls over enterprises’ decisions to
produce and invest (except with some restrictions on
major investment projects, as noted below), to buy and
sell, are to go. These decisions will be unfettered and will
reflect the enterprises’ autonomous responses to market
forces and state regulation via interest rate policy, for
example.° The two plans agree on the ultimate target of
the reform. However, the timing and sequencing are not
identical.

Division of Union-republic Tasks:
Similarities

The two plans also seem at first glance to share substan-
tially the same vision of the allocation of tasks between
the union and the republics although deeper scrutiny
reveals a difference of conception with fundamental con-
sequences. This allocation can be classified under four
areas: political and economic infrastructure, macro-
economic coordination, investment policy, and inter-
republic transfers.

(1) Political and Economic Infrastructure: Under the
Shatalin plan, in the political sphere, the union will
guarantee national security and provide for adequate
defense capability. It will manage transport, communica-
tion, information and energy systems; control defense
units, space research, and the nuclear power industry; and
implement national measures in regard to ecological
safety and disasters. It will create a single system of
patents, weights and measures, and meteorological ser-
vice, and organize all-union statistics and a common
customs regime in cooperation with the republics.

In the Gorbachev plan, "the management of activities
and targeted programs which demands unified leadership
throughout the land is assigned to the union." (Basic
Guidelines, p.4). The plan’s list of activities to be
managed by the union is not significantly different from
that under the Shatalin plan (Basic Guidelines, p. 4).

(2) Macroeconomic Coordination: While advocating
republic sovereignty, the Shatalin plan specifies a unify-
ing macroeconomic role for the union. There will be a
single currency, acommon monetary policy and unified
foreign exchange management. The banking system will
be reorganized in the inevitable two layers, consisting of
a central bank and commercial banks. The union will
develop long-term economic forecasts, and implement a
coordinated fiscal and monetary policy for purposes such

6 Interestingly enough, neither plan singles out any projects or any existing enterprise, except in defense, for state ownership. While, in principle,
any industrial enterprise can be privatized, some undoubtedly will remain in union ownership, given the inevitably slow pace of privatization.
Even in the Shatalin plan, 30 percent of industrial enterprises are to remain state-owned at the end of the plan. However, both plans single out

activities, such as railways and energy pipelines, for union management.

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as strengthening the purchasing power of the ruble with
a view to ultimate convertibility. The Gorbachev plan
echoes an identical macroeconomic role for the union
(Basic Guidelines, p. 3).

(3) Investment Policy: Neither plan envisages that the
enterprises will be totally free to allocate available funds
among alternative uses according to market criteria, sub-
ject to monetary policy alone. Both plans contain
provisions indicating that the state will play a role in-
fluencing the sectoral composition of investment (i.e.,
what, in Western parlance, would be described as "in-
dustrial policy"). In both, the union is assigned this task.

Thus, in both plans, major investment decisions will be
retained under union control. According to the Gor-
bachev plan, the union will draft and implement major
economic programs of national importance (Basic
Guidelines, p. 4). In the Shatalin plan, the union will carry
out structural shifts in the national economy via an active
investment policy (The Transition, p. 27).

(4) Inter-republic Resource Transfers: In both plans,
the union will be in charge of promoting inter-republic
economic and social equality via mutually beneficial
cooperation and assistance. A centralized extra-
budgetary fund will be set up for such resource transfers.

Division of Union-republic Tasks:
Differences

But these similarities are largely of shared broad-level
objectives. Close examination in fact reveals substantive
differences in the way the union-republic divisions of
rights and tasks are contemplated and the consequences
for implementing the shared objectives efficaciously.
The conception of union-republic relations in the
Shatalin plan is significantly different from and less
efficaciousness than that in the Gorbachev plan.

(1) The Conception of Union-republic Relations: As
noted in the introduction, the Shatalin plan starts with the
republics and looks up to allow for the union; the Gor-
bachev plan starts from the union and looks down to
allow for the republics.

In the Shatalin plan, with the republics the primary
focus, the recurring objective is to eliminate the tradition-

al monopoly of the union in several economic tasks, to
restrict sharply the scope of existing hierarchical arran-
gements with power emanating from Moscow, and to
give the republics a major and wider role.

Thus, for example, contrary to the declared objective of
unified foreign exchange management (in common with
the Gorbachev plan), the Shatalin plan declares that
union monopoly of foreign exchange reserves must cease
and the republics and local administrations must not only
own such reserves, but also decide the union’s share of
such reserves (The Transition, p. 67).! The Shatalin plan
states that all norms of wholesale, retail, and procurement
prices announced by the Ryzhkov government are to be
declared null and void in 1991, eliminating the current
union monopoly in pricesetting. Where the plan concedes
a role for fixed prices, as in basic materials and essential
items, these again are to be set in consultation with the
republics.

In the Gorbachev plan, by contrast, while the principle
of consultation and agreement with the republics is
embraced, the phrasing suggests that decisions on
specific issues will come from the union. Indeed, the plan
not only emphasizes the need for a "strong and efficiently
organized state power" but also for a consensus "by
bringing together all social forces that care about the fate
of the country and its people." (Basic Guidelines, p. 23).
More to the point, state power is to be revitalized by
restoring to full operation the vertical chain of joint
subordination (sopodnichenie). For example, the execu-
tive branch of the Russian republic will be subordinate
to both the republic Supreme Soviet and the executive
branch at the union level.® "Decisions adopted by higher
organs within the limits of their competence are binding
on lower organs." (Basic Guidelines, p. 23). At the same
time, the Gorbachev plan recognizes that state power at
the union level cannot be effectively deployed without
the consent and active participation of the republics.
Towards this end, the enhanced emergency powers of the
President must be bolstered by a strengthened central
Council of Federation which, under the Union Treaty
that Gorbachev seeks immediately, would provide an
institutionalized representation for the republics at the
top level of the union government (Basic Guidelines,

p. 23).

7 Gorbachev's own approach is revealed by a presidential decree of 2 November (Pravda, 3 November 1990, p.1), according to which the nation’s
foreign exchange earnings are to be divided into four categories: a union fund with Vneshekonombank for meeting the foreign debt obligations,
the retained earnings of enterprises and organizations, a republic fund, and another union fund presumably giving the union sufficient resources
for foreign exchange management until the ruble becomes convertible. Enteprises and organizations are required to hand over 40 percent of their
foreign exchange earnings for the first union fund while being allowed to retain an unspecified amount for their own use. The residual is to be
divided 90 percent/10 percent between the second union fund and republic discretionary spending under this formula, leaving possibly less than
5 percent of total foreign exchange earnings to be allocated for the latter use.

8 A law to that effect establishing a hierarchical authority of the republic executive branch over the lower organs at the autonomous republic and
local administration levels within the Russian republic was adopted by the Russian republic Supreme Soviet in October 1990.

The Union Treaty will define changes in central
governmental structure and demarcate the respective
roles of the union and the republics. Clearly, it is impor-
tant that it be signed. How can there be progress via
legislation and its implementation on specific issues such
as foreign exchange allocation and pricesetting without
such a treaty? Gorbachev’s view has been that the Union
Treaty currently under consideration should be signed
and the plan adopted by all the republics before legisla-
tion on specific issues of transition can begin.

But Yeltsin, ignoring the logic of this approach, has
wanted to bypass the question of the Union Treaty and
proceed immediately with implementing the features of
the Shatalin plan in the Russian republic. At issue, more
than the difference in the two plans, is Yeltsin’s focus on
the dominating Russian republic and disregard for the
divisive implications of his actions for the Soviet Union.
In the meantime, the absence of a coordinating
mechanism (to be specified in the Union Treaty) has
caused paralysis in the implementation of the recent
decrees (ironically, most of them as much in line with the
Shatalin plan as with the Gorbachev plan)’ issued by
Gorbachev under his emergency powers: the Russian
republic, in particular, has proven obstreperous and
"rejectionist."

(2) Macroeconomic Management: Also critical is the
manner in which the union will raise resources to carry
out its macroeconomic functions. Both plans charge the
union with the responsibility of maintaining employment
and steady growth in the economy, reducing inter-
republic inequality, and conducting foreign exchange
management for stabilizing the ruble. The ability to com-
mand adequate internal and external resources is critical
for fulfilling these tasks. Yet the two plans differ on the
key issue as to whether the union is given the necessary
powers to play this role.

In the Shatalin plan, the authority to levy taxes belongs
to the republics and local administrations. They will
hand over a part of the revenues to the union according
to some formula (which may take the republic GNP or
per capita GNP as a possible criterion). The plan states:
" The union budget will be based on republic tax con-

Padma Desai

tributions, enabling the union to exercise its delegated
authority." (The Transition, p. 21). In the Gorbachev
plan, by contrast, all levels have the powers to tax: "The
Union bugdet will be formed from Union (federal) taxes.
The tax rates and the items liable to taxation will be
decided by agreement with the republics." (Basic
Guidelines, p. 4). Again, recall that in the Shatalin plan
the union is the residual recipient of the foreign exchange
earnings of enterprises in various localities and republics,
whereas in the Gorbachev plan the shares are to be
specified by the union, albeit in agreement with the
republics. All in all, therefore, while the Shatalin plan
has endowed the union with macroeconomic respon-
sibility, it fails to bolster it with a matching and clear
authority to tax and to control foreign exchange earnings.
The Gorbachev plan is unambiguously superior in this
regard.

(3) The Role of the State: Pricing, Production, Invest-
ment and Distribution: The two plans are characterized
by striking similarities in their conception as to what
should finally emerge as the role of the state in regard to
the key questions of pricing, production, investment and
distribution. The differences relate to the speed and se-
quencing of the steps to be taken towards these largely-
shared objectives.

(i)The plans agree on the need to privatize the existing
enterprises. The Shatalin plan specifies ambitious and
accelerating targets of privatization. The Gorbachev plan
eschews such targets (which are probably beyond fulfil-
ment if experience elsewhere is a guide) even though
privatization is regarded as an essential objective. It
equally elaborates the intention to assign ownership
rights not only to private citizens but also to labor collec-
tives, cooperatives, shareholders and, finally, foreign
firms and individuals.

(ii)There is a parallel between the two plans in their
approval of negotiated (i.e., flexible) prices.!° Contrary
to popular accounts, the Shatalin plan (and not just the
Gorbachev plan) sees exceptions to the supply-and-
demand-determined flexible prices in two major areas:
(a) the prices of "basic materials" such as energy and
ferrous metals; and (b) the prices of "essential" consumer

9 The first decree, announced on 27 September (Pravda, 28 September 1990, p.1). seeks to enforce existing contracts of enterprises for ensuring
supplies of materials and spare parts. Local authorities can prosecute violators. The scond decree, of 4 October (Pravda, 5 October 1990, p.1),
allows enterprises the freedom to charge negotiated prices (instead of prices fixed by the Price Committee) on their wholesale transactions. The
third decree, of 2 November 1990 (Pravda, 3 November 1990, p.1), fixed the exchange rate of the ruble for trading enterprises at 1.8 rubles to the
dollar (instead of 0.6 rubles to the dollar) and abolished the multiple exchange rates for export and import transactions. Foreign investors can
now set up fully-owned enterprises and convert ruble profits into hard currency in foreign exchange auctions. The decree also specified shares of
foreign exchange (discussed above) accruing to the union, the enterprises, and the republics. All the decrees (except the last insofar as it assigns a
lion’s share of foreign exchange earnings to the union and the enterprises while leaving a tiny fraction to the republics) conform to the relevant
features of the Shatalin plan. The transition to the market has thus begun before the Union Treaty has been signed. Without the treaty, however,

the decrees are unlikely to be implemented in full force by the republics.

10 Although "negotiated" may suggest to Western economists "administered" rather than flexible prices, it is used in the plans to mean the latter. I

therefore follow Soviet practice here, for the most part.

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goods.!1 Presumably, both plans recommend the former
exception because of the presence of currently "unbreak-
able" monopolies in these sectors and the consequent
need to regulate prices, and the latter exception to avoid
social and political disruption.

Again, the difference is in the rapidity with which the
prices of other sectors (not covered by these exceptions)
are to be freed. The Gorbachev plan is more cautious. For
example, it states that, in concluding contracts for 1991,
enterprises are to use wholesale prices given in the USSR
Council of Ministers’ resolution 741 of 14 June 1988
(Basic Guidelines, p. 14). This injunction for the use of
administered wholesale prices implies that virtually all
prices will remain fixed in 1991.

The difference therefore is not in the conception of the
targeted "steady state" at the end of the plan; rather, the
optimal speed and strategy for getting there.

But one caveat about the Shatalin plan’s intention to
continue fixing the prices of 100-150 "essential" con-
sumer goods, while most other prices in that category go
free, needs to be mentioned. This is surely a recipe for
reducing the supply of these consumer goods: a lesson
we have learned in the West from the housing shortages
that follow rent control. This inevitable consequence of
the proposed price policy, which, by compounding
shortages of essential items, can seriously undermine the
credibility and commitment that the plan’s fulfilment
requires, apparently has not been appreciated by the
Shatalin planners.

(iii) Both plans address the critical reorganizational
issue raised by the fact that state control over economic
activity, down to the enterprise level, is exercised by a
vertical hierarchy of ministries and related agencies.

The Shatalin plan is explicit on the issue: the autonomy
of economic decisions by enterprises must be granted.
The plan presumably expects that the ministries will
wither away on their own and does not generally target
any of them for annihilation. The exceptions are gossnab
and agrosnab (the state supply and agricultural supply
agencies) and the ministry of (presumably only internal)
trade: both to be replaced by a new contracting agency.

The Gorbachev plan too recommends a similar con-
tracting agency (Basic Guidelines, p. 24) and, possibly
naively, is equally optimistic about the ability to take
ministries effectively out of enterprises’ lives. Ministries
are forbidden to interfere in the activities of enterprises,
in the hope that carnivores will turn to self-denying

vegetarianism. In fact, the plan urges that new structures
must "consistently and inexorably" eliminate organs that
do not meet the needs of the market economy (Basic
Guidelines, p. 23). Both plans thus share reliance on
exhortation and hope.

(iv) Finally, neither plan proposes a permanent role for
the state in the distribution system. But both envisage a
continuing role for the state in the distribution of
selected, "essential" consumer goods.

The Shatalin plan, however, enters a different mode at
the end of the plan. The number of "essential" consumer
goods drops to less than a dozen--again, their weight in
total consumption expenditure is not stated, so it is dif-
ficult to see what this reduction in coverage amounts to.
At the same time, the plan now makes a distinction
between flexible prices for farms for their produce and
fixed prices for consumers for 15 million tons of food and
2 million tons of meat procured presumably from the
farms at the (higher) flexible prices. As a result, we have
dual prices and dual markets: the consumers get 17
million tons of farm produce at fixed prices and the rest
of their consumption at flexible prices. The procurement
system implies, of course, a subsidy on the 17 million
tons and corresponding drain on the budget.

The Gorbachev plan seems to envisage a similar end-
of-plan system of dual markets, confines it again to a
similar menu of less than a dozen "essentials," but does
not restrict itself to any quantitative limits (such as 17
million tons of farm produce in the Shatalin plan). Nor
does it give estimates of the subsidy-and-budgetary costs
of the dual-price system that is embraced.

Transition: Sequential Stages
and Economic Strategy

Significant differences emerge on the question of the
economic strategy of transition to the end-states, quite
aside from those noted in regard to the union-republic
division of rights and responsibilities.

The plans’ central difference in the transition strategy
lies in the sequencing of the two essential tasks that both
the plans have in common: the macro stabilization of the
economy and the freeing of prices.

Put simply, the Shatalin plan sets up draconian targets
on stabilizing the economy within the very first 100 days,
using drastic cuts in the budget deficit, and then following

11 The Shatalin plan talks of a hefty 100-150 items as "essential" consumer goods in the early stages of the plan! While one would want to know
what these items add up to as a share of domestic expenditure, they include some big-ticket expenditures, such as on meat and bread.
12. The progress to freeing prices for farm sales is, of course, slower in the Gorbachev plan for the “essential” agricultural products (Basic Guidelines,

pals):

it up within the next 150 days with a tough monetary
policy, with the shift to flexible prices (barring the im-
portant exceptions noted above) following within less
than six months of the inauguration of the plan. Al-
though, for obvious reasons, the plan does not describe
this agenda as "shock therapy," that is what it amounts
to.

By contrast, the Gorbachev plan, which shares four
stages of unfolding policy, defined functionally but
without time dimensions, sets up a slower pace, taking
stabilization over a longer period. For example, where
the Shatalin plan targets the budget deficit for termination
by 31 March 1990, the Gorbachev plan talks more realis-
tically of a lower but still sizeable target (of 3 percent of
GNP as contrasted with 10-11 percent of GNP currently)
and then only by the end of 1991. The brakes are to be
applied, but not so suddenly.

At the same time, since stabilization is at lower speed,
the Gorbachev plan intends to continue over a longer
period the practice of administered (i.e. fixed by a resolu-
tion of the union Council of Ministers) prices for those
items for which flexible prices are ultimately targeted.
They will continue through 1991 whereas the Shatalin
plan declares that all administered prices for these items
will be null and void, beginning 1991.

Of course, the slowness of a shift to free prices and of
the stabilization program in the Gorbachev agenda are
functionally related. The freeing-up of prices can be
dangerous when macroeconomic disequilibrium result-
ing from budget deficits and associated excess spending
exists. Excess expenditure, fuelled by expectations of
price increases and by wage increases fuelled by actual
price increases, can then lead to an inflationary price
spiral.

However, neither the slowness of stabilization in the
Gorbachev plan, nor its rapidity in the Shatalin plan, is
desirable at present. The Gorbachev plan, on the whole,
is to be preferred, but needs to be amended to quicken
the pace of stabilization, and hence of the price reform
that can be undertaken.'*

The Shatalin plan is divided into four stages of 100, 150,
150 and 100 days.

Padma Desai

Stage I: The primary emphasis in this stage is on cutting
the budget deficit, though attention is paid to measures to
mop up excess stocks of cash and also to completing the
legal infrastructure to support the reforms promised in
500 days.

(i) The budget deficit is to be drastically rolled back
through measures such as a 75 percent reduction in
foreign aid and a 10-20 percent cutback of defense and
KGB outlays in the remaining days of 1990. No budget
program in excess of 100 million rubles will be approved
for 1991 (except those related to Chernobyl). Expendi-
tures in the range of 100 to 500 million rubles will have
to be approved by the union and republic Supreme
Soviets. All construction projects in early phases of
Start-up are to be suspended except those in consumer
goods.

(ii) The proposed steps for soaking up existing liquidity
in the economy are less draconian. Higher deposit rates
will be offered to the public to attract their savings. Some
state property—for example, army trucks—will be sold;
garages will be constructed; people will be allowed to
buy additional land for dachas. Small shops and factories
will be leased. Imports of consumer goods will continue:
this too soaks up cash from the public when the imported
items are sold.

(iii) In addition, the plan will carry forward the neces-
sary changes in infrastructure. In particular, privatiza-
tion plans will be accelerated. The State Property
Committee will start preparing guidelines for the
privatization of large state enterprises. The republics will
announce plans for the privatization of land. The right to
quit a collective farm, with a fair share of assets, will be
guaranteed to all farmers (and will not be contingent upon
the collective farms’ prior consent).

As regards the banking system, the current State Bank
of USSR will be converted into the Reserve System of
the Soviet Union, embracing the central banks of all the
republics.!> A single ruble rate will be established from
1 November 1990; multiple rates, resulting from the
current system of "differentiated hard currency coeffi-
cients" for different imports and exports will have been
abolished.!© Incomes will be price-indexed, with the
republics formulating and putting the indexation schemes
in place by 1 November 1990. The current tax rates, with

13‘ These issues, and hence the need to bring macroeconomic disequilibrium under control prior to freeing prices, were analyzed in depth in my
November 1989 Forum essay, "Perestroika, Prices, and the Ruble Problem.”

14 _ Extensive discussion of the planned policy reforms is contained only in the first stage of the Gorbachev plan, and its loose time frame of "eighteen
months to two years” till at least March 1992 coincides roughly with the period for which Gorbachev has been granted emergency powers by the

Supreme Soviet. (Basic Guidelines, p.5.)

15 The draft legislation currently under consideration by the Supreme Soviet incorporating these changes is expected to pass before the end of the

ear.
16 The prsidential decree of 2 November abolished these multiple exchange rates and set the ruble exchange rate for export-import transactions at

1.8 rubles to a dollar.

The Harriman Institute Forum

minor adjustments proposed by republics, will be used
for formulating the 1991 budget.

The Gorbachev plan’s first stage lasts longer, till March
1992. Butits agenda broadly goes over the same ground,
albeit less ambitiously.

(i) The plan target of aggregate budget deficit for 1991
is set at 25 to 30 billion rubles, amounting to 2.5 to 3
percent of GNP. The deficit will be funded by borrowing
from the public instead of from the state bank.

As in the Shatalin plan, expenditures will be curtailed
by cutbacks in investment and by suspending construc-
tion projects in early stages (except those for consumer
goods). From this alone, the budget deficit is expected to
be reduced by 30 to 40 billion rubles (Basic Guidelines,
p. 22). Further reductions will come from cuts in defense
and KGB outlays. Susidies to enterprises, with a few
exceptions, will come to an end.

At the same time, revenues are expected to rise from
increased turnover tax flows resulting from higher prices
(especially of imported goods) and from the sale of state
property (for example, trucks and cars of state organiza-
tions). Turnover tax revenues are also expected to rise
over time as a result of revised assessment methods and
greater coverage of items. The current union tax legisla-
tion will be retained for 1991 and will include amend-
ments proposed by republics.

(ii) The measures to soak up excess liquidity with the
people are also similar to those in the Shatalin plan. The
planners recommend offering higher interest rates on
deposits,” building garages, selling small plots and
houses.

(iii) Privatization is very much on the agenda. As in the
Shatalin plan, privatization is to start with trading, ser-
vices, construction, and small enterprises, and extend to
conversion of small and medium enterprises into joint
stock companies beginning in 1990. While labor collec-
tives (aided by installment payments, discounts and
credits) are to be assigned a priority in acquiring assets,
hasty sale of state assets is to be avoided. The procedures
will involve open auctions and competitive bidding.

As for land reform, the plan views a future with various
forms of ownership, envisaging privatization as emerg-
ing ultimately from the choice offered to farmers to leave
collective and state farms. The crucial decision of a
farmer’s right to leave is left to the republics to offer,
should they so desire: "Republic organs of power will

resolve the issue of a worker’s right to freely leave a state
or collective farm or other enterprise with a plot of land
and his share of accumulated property provided that he
undertakes private farming" (Basic Guidelines, p. 12).

Next is the legislation for private ownership. A
presidential decree of October provided the framework
for a free choice of various types of ownership — private,
cooperative, collective, shareholding, and the like. Under
the Gorbachev plan, these different forms of ownership
are endowed with an equal legal status and are entitled to
uniformly fair treatment (Basic Guidelines, p. 11).

The infrastructural agenda includes the setting up of a
two-tier banking system, as in the Shatalin plan, by
November 1990. It will have monopoly on the issue of
money and will regulate money creation in the economy
by changing reserve requirements and the discount rate.
The chairman of the system will be appointed by the
union President (Basic Guidelines, p. 15).

During Stage I, then, there are few differences of objec-
tives and targets. But while the Shatalin plan moves
rapidly towards price flexibility in Stage II and beyond,
the Gorbachev plan trails. With its reduced speed of
stabilization, the Gorbachev plan naturally soft-pedals
the pursuit of price flexibility as well: flexible prices (in
sectors where both plans agree they should be adopted)
are put off until well after the time they would appear
under the Shatalin plan.

Stage IT; The Shatalin plan shifts to 150 days for Stage
II and focuses now on monetary restraint and price
flexibility.

Both the budget deficit and the rate of growth of money
supply are to be reduced to zero (The Transition, p. 32
and p. 71). Towards this end, beginning January 1, 1991,
enterprises which make losses will be forced to close and
to lay off workers.

With the two exception of-"basic" materials!® and 100
to 150 "essential" consumer goods, all wholesale, retail,
and procurement prices fixed hitherto by the union Coun-
cil of Ministers resolutions will be declared null and void.

The Shatalin plan is of mixed mind as to the pain that
will follow from these measures. It is recognized that
enterprises will fail and unemployment will increase.
But the depth of these consequences, from the exception-
ally hard and swift braking of the economy, seems hardly
to have been appreciated. Instead, the plan derives com-
fort from the expectation that the privatization and for-

17 Higher interest rates, starting 1991, are also seen as a way of regulating enterprise demands for funds, thus introducing a further role for

monetary poli

18 "Basic" Aneane are exempted partly because they enter several products and a rise in their prices could prove ifnlationary (if wages cannot be
adequately controlled as prices rise) in their primary impact and partly because they are produced, in the Soviet context, by monopolies with
gigantic plants that make them de facto "natural" monopolies requiring price regulation as with utilities.

mation of up to 1000 to 1500 joint stock companies in
food distribution, trade and services will immediately
ease the supply of consumer essentials (whose prices, one
may recall, are to be kept fixed, causing a disincentive to
their production instead). Again, the plan expects to ease
the pain by indexing wages to prices. But surely, this
poses a danger to the program’s disinflationary thrust
unless, in effect, the emergency Presidential powers are
used to enforce an "incomes policy” (to offset the
prescription of indexing), as is also recommended by the
plan—in which case the pain will not disappear.

The Gorbachev plan’s second stage, coming long after
the Shatalin plan’s and most likely beyond the end of the
500 days, contemplates price flexibility as its main plank
since the economy would have been braked (more grace-
fully) to macro stability. The continuation of a tough
financial and credit policy, and a reduced budget deficit,
is planned. Privatization will proceed apace.

Stage III: The Shatalin plan expects the third stage of
150 days to continue freeing more prices, now beginning
to reduce (below 100 to 150) the number of essential
consumer goods whose prices are to be controlled.!? The
plan also suggests that policy be directed towards con-
structing more housing, to increase labor mobility and
therewith to moderate the structural unemployment that
would result from layoffs as unemployed workers must
find other jobs, including in other locations.

The Gorbachev plan, drawing its inspiration again from
the Shatalin document, urges likewise. The promotion
and materialization of a labor market are a main, novel
feature of the third stage in the Gorbachev plan. Coming
presumably at the end of 2-212 years, the Gorbachev
plan’s third stage also envisages a gradual easing of the
financial restraints (whereas the Shatalin plan’s early
third stage is still heavily into braking the economy).

Stage IV: But the Shatalin plan moves into an upbeat
mood in the last stage, again of 100 days . The economy
would have been stabilized and most prices freed.

"Denationalization and privatization will accelerate.
By the onset of the 500th day, not less than 70 percent of
industrial enterprises, 30 to 90 percent of construction
projects, wholesale trade in intermediate products, retail
trade, food distribution, and service outlets should be
transformed into joint stock companies, sold or leased."
(The Transition, p. 40).

The final phase of the Gorbachev plan has identical
features: a balanced budget, market-determined prices,

Padma Desai

accelerated privatization and above all, a convertible
ruble for domestic and foreign enterprises. As is to be
expected, however, the date at which this convergence
will take place is left unspecified.

In principle, the Gorbachev plan has clear advantages.
Its conception of the union-republic relations is more
consonant with the economic tasks assigned to the union
by both plans, while also less fuzzily reflecting the notion
of acountry held together in a federal mode. Equally, the
plan correctly shies away from initiating major price
liberalization until the macroeconomic stabilization has
been reasonably put in place. And it undertakes stabiliza-
tion with more time and with less reliance on drastic fiscal
and monetary policies that would brake the train to a halt
but run the certain risk of at the same time derailing it.
But these advantages also create risks.

The Gorbachev conception of the union has run into
continued political opposition from Yeltsin. The battle
has been joined and the two are maneuvering politically.
As of late November, the rounds had gone successively
to Yeltsin and Gorbachev. On November 16, Gorbachev
fell on his face in his performance before the Supreme
Soviet. The general reaction of these legislators and the
intellectuals was that central authority was no longer
operative: Yeltsin’s Russia was defying Gorbachev’s
decrees issued under his emergency powers. But in a
tactical manouvre a day later, Gorbachev unveiled a plan
that reflected his own unifying conception of the union-
republic relationship, and the coordinating role of the
union therein, and Yeltsin had been temporarily con-
tained. The icy reception of November 16 was replaced
by thunderous applause on November 17, the Gorbachev
proposals were approved by a massive vote of 320 to 25
in the Supreme Soviet and the reaction of the Soviet press
was favorable.” But Yeltsin, emerging two days later,
rejected the new initiatives as well. Gorbachev will there-
fore need to continue containing this opposition not just
to him, but to his conception of the union as a harmonized
set of republics.

Gorbachev’s slower pace on stabilization and hence on
price-flexibility reform also faces grave risks. At this late
stage in the unfolding of perestroika, when five years
have elapsed, the absence of a fast-paced program comes
across politically as a cop-out; prudence can be mis-
construed as a failure of nerve. This is a danger since
Yeltsin’s highly palatable populism is based on the false
promise that quicker pace will be painless, rather than
more painful.

19 Bread, milk, sugar, vegetable oil, essential medicine, school textbooks, public transport, and utility rates are mentioned as continuing candidates

for price fixing.
20 See New York Times, 18 November 1990.

The Harriman Institute Forum

The growing distribution problems in the cities, in
regard specially to bread and meat despite a substantial
harvest, have also produced an acute sense of crisis that
fuels the revolution of falling expectations as to what
Gorbachev can deliver.

He therefore simply does not have the luxury of sticking
with a slow-paced plan, no matter how much more sen-
sible this would be under other circumstances. Without
going to the extremes of the Shatalin plan, he needs to
shift forcefully to a faster pace. How is this to be done?

Next Steps

Gorbachev’s next steps will evidently have to address
the issues of union-republic relations and the pace of
reform.

The efforts at getting the republics, especially the Rus-
sian republic, to accept the view that the union must
constitutionally play a coordinating role among republics
(harmonizing their essential economic policies), will
have to be continued. That coordination of key economic
policies in different republics is desirable, in contrast to
each republic going its own way, is a proposition that
applies only to republics which remain within the union.
The question as to whether and how republics can exit
from the union is separate and will also have to be
resolved politically in the near future.

The failure to appreciate the necessity of central coor-
dination, with attendant economic instruments and politi-
cal authority to use them effectively, comes from several
sources. One school of thought presumes that har-
monization (and therefore coordination) would emerge
simply because different policies in different republics
would lead to the survival of the "fittest" policy. But this
ignores the more likely outcome of inter-republic con-
frontations. For example, the freeing of prices of food
items in one republic would suck in food supplies from a
neighboring republic where prices are kept fixed. This
could lead to the latter republic also freeing prices. On
the other hand, it might impose export. restrictions on
food and provoke a tit-for-tat response from the former
republic, creating chaos in the process. This latter
scenario materialized in the summer of 1990 when the
Russian republic lifted procurement prices of food, at-
tracting supplies from the neighboring Ukraine, which
retaliated by imposing embargoes on such exports,
prompting a quick cutback in oil deliveries from the
Russian republic.

Again, it is asserted that macroeconomic stability for
the union (in the shape of ex ante savings and investment
balance) will emerge despite lack of fiscal authority for
the center simply because republics will have to finance

their budget deficits through public borrowing and with
the central bank refusing to print money. But is it really
credible politically to assume that the central bank will
in practice be able to stand up to, say, the Russian
republic, unless the central bank is backed by clear and
firm authority vested in the center? Who will be able to
face down the wayward republics? The assumption that
economic logic, rather than the political realities (already
manifest), will prevail to create the necessary macro-
economic equilibrium is not persuasive.

But, even if it were, it is absolutely necessary to grant
explicit fiscal powers to the center. If the center is not
endowed with the fiscal authority to raise revenues and
to redistribute them, the republics will prosper or lan-
guish at a pace determined exclusively by their endow-
ments, initiative and good fortune. Without the glue
provided by the redistributive center, inter-republic ten-
sions will accelerate, aggravating their breakaway ten-
dencies. Promoting the disintegration of the union is not
part of the Shatalin plan’s preferred objectives: and yet
that would be a likely outcome of its design of union-
republic economic powers.

Thus, the Shatalin plan encourages divisive tendencies
that would result in the disintegration of the union even
as it cripples the union’s ability to produce the necessary
harmonization of key economic policies among the
republics that would choose to remain in the union.

Down the road, it may well appear that the Russian
republic, with or without Yeltsin, will tend to play an
aggrandizing and even self-serving role, going it alone
without regard for the consequences for other republics
and for the union. In that case, for the remaining
republics, the traditional hegemony from the center will
be replaced by a dominating role of the Russian republic.
It is therefore not inconceivable that a politics of contain-
ing the Russian republic may emerge, strengthening
Gorbachev’s hand. This politics may even turn to en-
couraging a fragmentation of the Russian republic. The
declaration of sovereignty by several autonomous
republics within the Russian republic has already brought
such a scenario into the realm of possibility.

Those who hold the view that the union must play a
strong coordinating role among the republics are also
likely to be favored by the involvement, on the increase
since the Houston Summit in July 1990, of international
institutions (the IMF, the World Bank and the European
Development Bank) in the business of perestroika. These
institutions are unlikely to favor credit and other agree-
ments without a clear central authority that can guarantee
a coherent and coordinated set of policies across the
country. In the absence of such steering from the center,
contradictions and conflicts can readily emerge (as they

have already tended to) among the republics, rendering
more fragile an already delicate economic situation.

But how can the pace of reform be quickened? How can
prices be freed without generating an inflationary spiral?
A coherent plan that controls the macroeconomic situa-
tion and fulfills the microeconomic objectives of price
reform is feasible and now urgent. Its components can be
spelled out as follows. !21

(1) The option of a temporary freeze on private bank
balances , sweetened with the offer of attractive interest
payments, should be considered seriously. The adoption
of such a temporary freeze !22 woulénablpriceeformo
be implemented on a faster schedule.

"On the macroeconomic front, the privatization process
must continue, creating the assets that can be an alterna-
tive to cash holdings. But this is an inevitably slow
process and increasingly seen to be so everywhere, even
in fast-moving Poland. Evidently, a currency reform
such as a partial freeze of the personal holdings of bank
balances..., for say three to five years, would do the
necesssary job of preventing an inflationary price spiral
as prices are freed. As incomes and investments grow
with the price reform, and stabilization takes root, the
"desired" money balances will rise to match the frozen
balances, which can then be released without serious
inflationary consequences. New assets will also have
become available through ongoing privatization. The
planners ought to view this as a less painful, and more
efficient, option to pursue than the cruder method of
relying excessively on the monetary brakes [of the
Shatalin plan] to resolve the macroeconomic dilemma
with resulting unemployment and recession." (pp. 188-
189).

(2) Next:

"A wage or incomes policy is absolutely essential for
maintaining the macroeconomic discipline. The example
of Poland, with rising unemployment, demonstrates the
results of applying sharp monetary brakes. Indeed, the
absence of wage discipline will perforce require a heavy
dose of monetary restraint to control the resulting infla-
tion, with severe unemployment as its consequence. A
social contract on wages is absolutely essential during the
transition to a market system if not beyond. Gorbachev
will have to pull together the diversifying political leader-

Padma Desai

ship and groups in persuading the unions to accept the
necessary discipline as a way of avoiding serious (macro)
unemployment during the transition. The miners and
railway workers need to be reminded that there is a
trade-off between wage restraint and unemployment as
tools of macroeconomic policy in the market system to
which a transition is desired, and that the former is the
preferred alternative.” (p. 189).

(3) With these measures in place alongside the less
drastic but firm braking of budgetary deficits and rate of
growth of money supply, prices could be freed more
freely even for "essential" consumer goods than en-
visaged in both the Gorbachev and Shatalin plans under
a "dual pricing" framework for these items. The
legitimate worry that social unrest would erupt and en-
gulf the reform due to rise in the price of essentials could
then be assuaged by adopting such a system practised in
countries of South Asia:

"Following it, a minimal basket of consumption items
such as meat, bread, sugar, and cooking oil...would be
made available, in fixed rations per individual, at fixed
prices in state stores. But beyond that, everything would
be bought and sold in unregulated, free markets
everywhere. Thus the system would combine elements
of guaranteed access of a minimum basket to everyone
in state stores, while letting the market incentives operate
freely for the rest. The implied subsidy for the guaranteed
distribution through state "fair price shops" can be
financed, partly or fully, by explicit agricultural taxation.
The tax revenue can be used to purchase the basket of
essential items in the market for subsequent distribution
at lower prices in state stores." (pp. 191-192).

(4) More recently, however, a yet more attractive way
of implmenting the "dual pricing" formula for bread and
meat has become part of the possible policy agenda for
the Soviet economy. Thus, in two recent New York Times
op- ed articles, written in quick succession, a credit-
financed foodgrain-and-meat sale agreement with the
Soviet Union has been proposed, stressing the mutual-
gain aspect of such a deal. !23

The mutual gain arises in the first proposal for an annual
sale for five years of at least 20 million tons (half again
of the "normal" imports by the Soviet Union in 1989) on
credit, to be repaid in convertible currency beginning the
sixth year. The sales are to come essentially from the

21 ‘The details and quotes which follow are from Chapter 10 of the updated (1990) edition of my Perestroika in Perspective.
22 ~— Certainly, it cannot be debated in the Supreme Soviet, and would have to be announced as a "surgical strike” under Gorbachev's emergency

ers as part of a comprehensive and articulated program.

23 e Jagdish Bhagwati and Padma Desai, "From "Uruguay to Moscow," New York Times, 12 November 1990; and Senator Sam Nunn, "The Gulf
Isn’t the Only Crisis," New York Times, 18 November 1990. The Bhagwati-Desai proposal has been reported and discussed by leading economic
columnists: David Warsh (Boston Globe, 13 November 1990), Peter Passell (New York Times, 21 November 1990), Hobart Rowen (Washington Post,
29 November 1990), and Lindely H. Clark, Jr. (Wall Street Journal, 29 November 1990).

11

The Harriman Institute Forum

European Community, whose "surplus" agricultural
production would find a temporary new market, enabling
the Community to come forth with a more generous and
acceptable offer of agricultural liberalization without
which the Uruguay Round risks failure.2* On the other
hand, in the second proposal, which offers no details, the
mutual-gain feature relates to the fact that grain sales
financed with credits from the Commodity Credit Cor-
poration would support U.S. agriculture, presumably
offsetting the effects of the proposed reductions in
budgetary support.

From the viewpoint of Soviet economic reform, within
which the first proposal is clearly set as a comerstone, the
deal has distinct advantages:

(i) the proposed imports are large enough to support a
significant program of minimum-ration entitlements (in
the dual-pricing framework) through state shops in the
major cities, enabling the authorities to formally set free
agricultural prices in the outside market;

(ii) the program can be implemented without the need
for additional taxes to finance internal procurement: the
imports sold in the state shops would soak up private
expenditures and be a deflationary force in themselves;

(iii) the immediate impact of such a program would also
be to reduce the hoarding by collective farms that is
currently feared as contributing to the distributional crisis
in the cities: the expected price increases (that induce
hoarding for later sale) would no longer be massive if an
added 20 million tons of imports are proposed to be
distributed annually; and, more important,

(iv) by enabling the outside prices of agricultural
produce to be freed completely, it would accelerate the

24 Bhagwati and Desai, ibid.
25 Nunn, ibid.
26
fashion.
27

rate of privatization on land and reinforce the production
response from all farms. The scheme would enable the
Soviet economy to register prompt and substantial in-
creases of output in the one area (agriculture) where other
socialist countries (for example, China) sensibly moved
ahead first, establishing a solid beachhead for more
economic reform.”

(5) The role of foreign resources in accelerating the
transition is, in fact, critical. Aside from the proposed
credit-financed sale of grain and meat, the Soviet Union
can use foreign investment in several areas. At the top of
the list is the urgent need of the consumer goods sector
for advanced technologies, enabling it to provide an
increasing range of consumer goods to the restive popula-
tion. But this route cannot be effectively taken unless
profit repatriation, and some assurances on importing
intermediate items where necessary, are guaranteed until
some future date when the ruble becomes convertible.
Here again, untied credits can be used in the next few
years to assure these preconditions, facilitating success-
ful inflows of foreign direct investment.

But, no matter how important foreign credits and
resources are to perestroika’s success, they cannot do
much good unless they are properly integrated, as
proposed above, into a coherent program of economic
reform. Nor can they materialize on a significant scale
unless glasnost, and the consequent goodwill of the West,
remain secure.

Padma Desai is Professor of Economics at Columbia
University and the W. Averell Harriman Institute for
Advanced Study of the Soviet Union.

The budgetary liabilities of repayment would arise beginning in the sixth year, by which time the transition should have been made in some

In fact, even the halting progress of perestroika in farming has contributed to an acceleration in the rate of growth of grain yields in the last five

years. This result emerges from the application of an econometric model developed by me in "Weather and Grain Yields in the Soviet Union,”
chapter 10 in The Soviet Economy: Problems and Prospects (Oxford: Basil Blackwell, 1987), which permits me to adjust yield data for weather
variability. See "Grain Yields Under Gorbachev," mimeographed, Economics Department, Columbia University, December 1990.

i

500 Days: Shatalin At Columbia

(On October 4,1990, Soviet economist Stanislav Shatalin, coauthor of the so-called 500 Days plan to propel the
Soviet Untion into a market economy , spoke to a packed house at Columbia's School of International Affairs. The
session was chaired by SIPA Dean Alfred Stepan; a former student of Shatalin’s, Harriman Institute, economics
professor Richard Ericson , agreed at short notice to serve as interpreter. The session lasted two hours; what fol-
lows is a Slightly edited transcript , with additional translation based on the Harriman Institute’ s tapes )

[Applause] You have welcomed me so well. I wonder
what it’s going to be like after five hundred days!
[Laughter] The "Five Hundred Days" program is more of
a symbol than an actual means of bringing about a market
economy. It would be easier if it were a question of
teaching Americans at Columbia University to go to a
command economy rather than getting the Soviet Union
to a market economy. [Laughter]

In the fifteen minutes that have been given to me I will
give you a quick outline of the program for a transition
to a market economy that is now under consideration in
the USSR Supreme Soviet and which has already been
adopted by the Supreme Soviet of the Russian republic.
The program is now being examined by the parliaments
of all the republics. By the fifteenth of October we must
come up with a new text which takes into account all the
comments and discussion in the fifteen republican and
the all-union parliaments.

There are three programs which have been presented
to the Supreme Soviet. One is the program worked out
by the President and his advisors. There is the govern-
ment program — the Ryzhkov program. And there is this
program. While all these very heated discussions are
going on I’ve decided to come spend some time in
America and see a what a real market looks like.
[Laughter]

I’m going to name some of the basic principles behind
this program and then I will answer questions. First, the
program accepts all forms of property, including private
property, and absolutely avoids any ideological bent. I
want to emphasize that this is not a program for a market
economy but for a transition to a market economy, which
includes the stabilization of the economy. The second
principle, close to the first, is that our program accepts
and encourages free enterprise.

The third, and this is something very important which
we had to keep in mind in drawing up this program is the
following. Practically all of the republics have declared
their economic and political independence and are, using
the terminology of our President, sovereign states. One

13

of the key problems was to take into account all of the
specific details and differences of the various republics
while at the same time creating a program that would
unite the republican economies into a unified all-union
market. In the past we always described them as
sovereign republics and so they had the right to leave the
union and so on. But that was a verbal covering, not for
real. Now that the republics really are sovereign states,
we have the difficulty of trying to develop forms for the
introduction of a credit system, a monetary system, fiscal
and monetary policy that would allow them to stay con-
nected and go through the transition to a market economy
through the structures of the central union.

In general we had to base all of our calculations upon
the current realities of the Soviet Union. That is, that the
USSR that we have known up until now is becoming a
thing of the past. The union must be built by consent, the
consent of sovereign states, upon brand new principles.
And in this program we tried to take into account that the
sovereign republics are actually sovereign states. We
tried to determine what functions the republics should
give to the union. The question was very difficult, but
discussion revealed that if we took sovereignty of the
republics into account in a very specific sense, that this
could lead to the creation — through a new economic
system — of a union of a very different type.

I won’t heighten the fact that there is a very serious
struggle going on between all-union legislation and the
laws being passed by various republics. The economists
who worked on this program all came to the agreement
that to come out of the crisis situation in which we now
find ourselves, we must all work together. But we must
take account of political and national realities which
exist. Now we have to accept the principle that in our
country, as before, the supreme law is the law of the
union, but that the republics are given various economic
functions and resources located on their territory.

The third [sic] principle, and this is not really a prin-
ciple but a complex of measures which need to be under-
taken, is the need to introduce a very severe budget
regime, very strict monetary and fiscal policies so as to

The Harriman Institute Forum

get a grip on the budget deficit, and measures which
would gradually strengthen the consumer goods market.
That is, we wanted to work out a program that would
bring about the stabilization of consumer demand and
perhaps, if it is very successful, raise the value of the
ruble.

In the current situation, as you know, the ruble has lost
its value as a currency. Republics and cities, so as to
ensure goods for their populations, have taken measures
to prevent the outflow of goods. This means that the
value of the ruble as a currency has fallen. Those familiar
with our economic circumstances know of the distribu-
tion by rationing, distribution of products through
enterprises, other non-market channels — the consumer
market is now practically non-existent. Everyone is run-
ning away from the ruble. There is emerging a system of
parallel currencies — ration coupons, dollars, cigarettes,
whatever — and these are now real (in quotes) "curren-
cies" being used, and not just in the black market. We
seem to be well on the way toward getting all the
republics to agree that they won’t pass contradictory
laws or start printing their own currencies. We will all
try to work together for a single, strict financial and
monetary policy.

The next principle is that if the measures for stabiliz-
ing the economy, for revitalizing the budgetary and
monetary systems become successful, then we will be
able to begin price liberalization. Of course, we will
never be able to do this in five hundred days. It will take
longer. But a decision is needed and if we do not begin
to take these steps then we will not have an economy.
There are a lot of questions now about the attraction of
foreign capital for revitalization, but for this to be effec-
tive you need hard currency. And its very hard to bring
about a convertible currency because the ruble is not yet
convertible within the country. In the western economies
the one item that is absolutely scarce is money, whereas
in Our economy the one thing in absolute surplus is
money. [Laughter] If we cannot succeed in stabilizing
the ruble then it will be absolutely impossible to bring
about a convertible currency. We needa hard currency
as the basis for the development of a market economy, to
be able to settle things in the west, to purchase.

The next difficult issue which we examined in our
program is the question of land reform. You know that
we have our collective farms and state farms. They have
shown that they are inefficient. Therefore the program
that will be approved by the Supreme Soviet does not
dictate but suggests that there be a lot of private owner-
ship of land.

I should have mentioned earlier when I was talking

about free enterprise and property that the idea of
privatization or de-nationalization of the economy — of

many state enterprises — is one of the key principles for
a transition to a market system. The question of private
ownership of land is still very controversial. But the
process of change is going very rapidly. Only a year and
a half ago, the policy was such that no form of private
ownership could be tolerated. Now even the
government’s program considers that private property is
a necessity. This doesn’t speak directly to the question
of private ownership of land, but experience has shown
that ideological barriers to economic activity are gradual-
ly being removed.

Many in the country are accusing us of destroying the
collective economy, state and collective farms and all that
existed in the past. We believe that all forms of property
must be on equal footing. Moreover, the new forms of
property must be given special support. The president
has called for nationwide discussion of the problem of
private property and even a popular referendum. I do not
think that it will go that far, but there will be some sort of
compromise. A weaker form of privatization of land will
be suggested. This is my view, although I myself support
dropping restrictions on private ownership of land.

The next question that was very difficult for us is the
issue of the non-commercial sector and the service sector.
I’m talking about health care, education, culture. As you
know, in our country these services are offered basically
for free, although there is a parallel structure of services
for payment. Our program states that the basic social
guarantees ought to be preserved, that there should be
free health care and education. However, a set of sup-
plementary services must be formed by the commercial
sector, and market relations should also prevail in this
sphere. The program also looks at a number of measures
for the social security of the population, such as indexing
and income maintenance. We are thinking first of all
about pensioners and the poorest section of the popula-
tion.

One of the key principles of the program is that we are
counting on widescale cooperation with the west. And
under "west" I include the east as well, South Korea,
Japan and so on. [Laughter] I use term "west" for the
market economies. Without cooperation with the west
we will not build an efficient market economy. This help
must be multifaceted. It begins with credits and goes on
to moral and intellectual support for the reforms. Of
course, the problems are extremely serious. The liquidity
of the Soviet Union has fallen dramatically. You know
all this, and you know about the monetary problems of
our economy. We probably have never been in such a
difficult position regarding foreign exchange than we are
now. We hope that the program takes off and that there
will be grounds for western cooperation. In my opinion,
a good market system and a healthy Soviet Union —

stronger, a more democratic economy, more open, a
USSR that is no longer an empire — is something that is
in the western interest.

The last issue is not an economic one, but of the
political system, of political reforms which will support
the implementation of real economic reform. People
must feel that they are living in a state respectful of the
tule of law, within a political structure with "normal"
political institutions. People must know that these struc-
tures will help them and will not forget about them in the
rush to change, and therefore they will be able to give
support to change.

And a last half-joking, half-serious comment. You
know, when we worked out this program, the Five
Hundred Days, we did it according to the old Russian
tradition — at a dacha. Even Alexander II sent his
advisors out to a dacha and told them to come up with a
reform, and they came back with the freeing of the serfs
— even if it wasn’t a very good law. [Pause] In the sense
that it didn’t work very well. [Laughter] At this dacha,
we created a free political zone where all views and
positions were allowed: democrats, social democrats,
monarchists, anarcho-syndicalists, all sorts of parties.
And then when the representatives of the fifteen republics
joined us in the first couple of days, the situation became
extremely complicated. All were quite angry for a while.
And seeing this, I announced, "If I see you working on
these difficult questions angry and without a smile, I’m
going to start fining you. And not in rubles, whose value
is tumbling, but in Swiss francs!" One thing we’ve had
in our developing democracy, and you see this watching
the debates in the Supreme Soviet, is that everybody’s
acting like they’re in a gladiator fight. So when we speak
about cooperation with the west, I think that the smiles
of westerners including Americans, and your applause
(which I haven’t earned), will help us in solving the
problems of instituting a market economy. Thank you.
[Applause]

QUESTION & ANSWER SESSION

QUESTION: You stated that Russia is not an empire.
In that case, why do Russian troops kill women and
children, and so on. Answer for your demagoguery.

SHATALIN: You know, for me the issue of what’s
happened in Azerbaijan, in Georgia and other places,
Kirghizia, in the Baltics, is a disturbing and grave prob-
lem. As to demagoguery, free persons have the right to
label each other with all manner of words. Of course our
history has been full of tragedy. However, we should not
believe that all of this is in the past and that the things
about which you have spoken cannot happen again. All

15

the same, I think that in solving the problem we should
attempt to gain the people’s trust, tell them the truth, give
them rights; of course, rights which are enforceable. And
in this way we can move to correct the problems which
you mentioned.

QUESTION: I wonder whether you could elaborate
about your picture of the debate at the dacha which you
described. I happen to have read most of the interviews
which you gave in the Soviet and in the western press,
and I have found them very persuasive. And for that
reason I am all the more curious about the kinds of
political and economic arguments that are being counter-
poised to one another in the debate about economic
reform in general, but perhaps about a few plans in
particular.

SHATALIN: We did not really have political debates.
And formally there is nothing in the document about
those political changes which are necessary to accom-
pany the economic reform. Of course we all understand
that this is realizable only with democratic political struc-
tures. We basically discussed the economic problems.
The most important issue was the following: Who owes
whom the most? The principle of the declarations passed
by republics is that everything located on the territory of
the republic in question belongs to that republic. We had
to organize the scheme so that each of these republics, if
they were to remain in an economic union, would find
themselves in a more advantageous position. To get out
of this crisis all must realize that the real set of mutual
economic relations is very large.

One of the hardest questions was tax policy. Original-
ly our document had the enterprises and organizations
paying taxes into the local government and republican
budgets. The sovereign republics would then pass on the
funds to support the various functions and authority
delegated by them to the union. And in this version the
level of tax transfer for each republic would depend on
either GNP or GNP per capita. But another approach was
suggested, that there should be a federal tax on enterprise
profits, the rate of which should be determined by consent
of all the union republics. Now, in the program which
was presented by the President to the Supreme Soviet,
there is this provision for a federal tax on enterprise
profits.

Another difficult problem was how to determine the
share of the debt to the west owed by each republic. Here
also a sort of compromise was found. We took note of
what was already owed and fixed who will pay what and
how. But in future any republic, if it so wishes, can take
on new debt from the west. It alone, however, will be
carry an obligation to repay that debt. This is one of the
most difficult questions, in an economic sense, that we
discussed with the various union republics.

The Harriman Institute Forum

QUESTION:I’d like to know a little more detail about
you plans for the privatization of state enterprises...

SHATALIN: ...Let us propose the following. Right
now the population has in its hands roughly four hundred
and fifty billion rubles. That sum can be divided into two
parts. The first is the portion that people would immedi-
ately part with if goods and services appeared on the
market. The second portion is what could be called the
population’s capital, which it would not rush out to spend.
It was therefore proposed that small enterprises — in
services, in agriculture, in retail, in the restaurant in-
dustry — could be bought by individuals who would
become entrepreneurs.

As concerns the largest, most important enterprises (in
terms of their scale and output), of course there can be no
question of privatization at this time. People simply do
not have the money for this. A few schemes have now
been proposed as to how the enterprises of the state sector
should be turned into joint stock companies. These firms,
even if they remain state-owned, should be allowed
freedom regarding their economic activity. There are a
number of other methods of privatization: leasing and
the introduction of stocks which could be bought by other
enterprises, by the population and by foreign entities.

I think that to form anormal economy we need to have
anormal labor market. Naturally, the question also arose
as to whether we want to make people pay for housing.
The principle now is that all housing should be paid for.
It must be a market good. But for the poorest section of
the population, those socially disadvantaged like pen-
sioners, invalids and so on, it is proposed that they be
given apartments outright or for small, symbolic pay-
ments, but without receiving it as their property. Those
with higher incomes, however, will have to look for
housing opportunities in the market. In the end, the
revenue from giving away wealth to the population will
equal the agreed-upon prices. If only the population will
purchase it. In fact, in the countryside we practically
already have paid housing, rentals and cooperative hous-
ing. Therefore, it is only in the massive, state-owned
apartment complexes that a market basis is lacking. Even
these we intend to sell off as property, especially the new
units.

Of course, its very difficult to set up a labor market.
Our population lives in regions with their own traditions
and culture, with their roots. Migration of the population
from man-power surplus areas like Central Asia to
shortage areas like the Ukraine and the Baltic area is
difficult because of non-economic factors.

You rightly raised the question of how we are to
valuate the worth of housing and enterprises targeted for
privatization. There are no market prices, so any price

16

put on an enterprise will be a non-market one. However,
you must take into account the fact that gradually more
and more prices will be freed up and that a smaller
proportion will be set by the state. Eventually there will
be a more or less equilibrium market for housing.

Another thing about privatization. We understand that
the portion of the capital stock that the population can
buy is actually quite small. In the rest of the world,
including the United States, methods have been worked
out for privatizing enterprises for which there is not
enough ready capital available in the population. Of
course, this raises a number of very serious political as
well as economic questions. In our country these are
exacerbated by the nationalities tensions, and the this
makes the problem very, very difficult.

Some have suggested that we just give away state
property for free. You could then divide it equally among
the population, including the children. Another approach
is to give property to the labor collective that was exploit-
ing it as a State enterprise. Here another trap arises.
Some work in very good, successful enterprises while
others work in very bad ones. We would create a new
version of serfdom, where those working in the bad
enterprises could never get out of them. And who owns
more? Let’s say that I work in an enterprise and I ear
more in a month than my colleague. Let’s suppose that
that’s fair. So I could say that since my income is higher,
this enterprise is more my property?

We weren’t able to make any specific recommenda-
tions with regard to controversial forms of privatization
because they would run up against social, political and
especially nationalities problems. The issue of privatiza-
tion as it appears in our program is still open for discus-
sion, and we want to consult with western economists to
figure out how to do it most effectively. It is all the more
urgent because if privatization is so difficult to bring
about, then how can we expect the economy to become
more dynamic in the next year and a half?

QUESTION: Your neighbors embarked earlier on a
departure from a central command economy. I"m think-
ing particularly of Hungary and Poland. My question is:
Do you pay attention in general to their experience in
creating capital markets, a banking system, marketiza-
tion? Do you consult with them, and if so, what con-
clusions have you drawn (allowing for all the differences
in scale) from their experience?

SHATALIN: We are of course taking into account the
experience of the Eastern European countries as well as
world experience in privatization. Your question is quite
just, as Eastern Europe is closest to our condition. Let’s
start with Poland. What can we say here? Poland is more
or less homogeneous. Virtually everyone is Catholic. In

Poland there was Walesa. [Laughter] And they also had
the Pope. [Laughter] To finish, Poland has suffered
through inflation for much longer and the population has
had time to get used to it. Now about Hungary. It’s a
monolithic nation. It is a country in the center of Europe
and it has a European market mentality. It has a great
agricultural sector, a great one.

In our country, everything is exactly the opposite.
Masses of nations, of people, of religions, of conflicting
socio-political and moral values, cultures and so on. Our
experience has been a troubled one. But there’s another
approach. We have a new ambassador from Poland, and
I spoke with him for some time. He taught me how not
to privatize. He said, "You have tremendous problems
ahead of you, and you should not undertake privatization
the way we did. Of course, it would be stupid of us not
to take account of the experience of these countries, to
learn from their mistakes and successes. But you under-
stand, to copy the experience of others in economic
policy is very difficult. The idea of capitalism in Japan,
in Sweden, in the US and in the USSR is not quite the
same. [Laughter] There are many capitalisms and you
have to take into account a great number of factors not
covered by any program. To copy the experience of
others is like what the great Sir Francis Bacon said: A
monkey’s resemblence to humans is precisely what
makes it disgusting.

QUESTION: Among the issues that were debated in
the Supreme Soviet in the last couple of weeks, one of
them was the question of, after the plan is adopted, what
institution would there be to implement and administer
it. And as you know, this led some people to argue that
an administrative defeat would come if the central
economic ministries were [left] in place. Which I think
that you, in your salty way, shouldn’t think a very good
idea.

SHATALIN: I think that this is one of the most
important issues related to the implementation of our
program. How pretty it looks on paper. If there is no
mechanism for its realization and people able to carry it
through then this is all meaningless paper. There has
been talk that we need to introduce presidential rule "of
the American type." This is, of course, a crude com-
parison with America. The idea is that the President
should become the organ of executive power. On the
other hand there is the problem of who will implement
the program at the republican, provinial and other levels
of the power pyramid. This issue is being actively
debated at the moment; legal scholars are working on
draft proposals. But this is a really difficult question. I
consider that this program will be implemented, regard-
less of organizational support structure, only if the Presi-
dent is personally accountable for it.

We modestly proposed to set up under the president
an inter-republic economic committee. It’s not clear
what its real powers or structure should be, but it should
act as a sort of extraordinary organ overseeing the reform,
spotting complications, what measures need to be taken.
All the republics must be represented. Now it is impos-
sible to simply issue orders from the center. The question
arises as to whether we need the government in its present
form or whether we should create some sort of council of
the national economy to replace it. On this point I really
cannot add anything.

QUESTION: Would you say something about the
effect of migration within the Soviet Union and emigra-
tion from the Soviet Union on your plans? And secondly,
what’s happening and what do you plan to do about it.
One has the impression that many people migrate in the
country because of fears. One of the reasons for returning
to or leaving a republic is because of environmental
reasons. One hears that twenty percent of the population
of Byelorussia must leave where they’re now living
because of the closing of factories and the effect of
regional economic trouble. How big a problem is it, and
what are your plans for dealing with it?

SHATALIN: Well, in the program we really didn’t
deal with this problem even though it’s a very big one.
First about internal migration. I’ve already spoken about
this. I think that in the near future nothing will change,
that from a few republics -- the Central Asian and
Transcaucasian ones -- there will will be no real migra-
tion to other regions. Therefore, we thought that our task
was to tailor structures that would be suitable for these
specific countries, their mentalities, religious views, be-
cause it’s a different world.

Naturally, the problem of emigration to the west is a
very difficult one. We are currently very worried about
it. Cultural figures are leaving, scientists are leaving.
This is retribution for our mistakes. It’s something we
must pass through because we cannot erect barriers
anymore. Although our democracy is young, it has ma-
tured to the point where we cannot force people to do
things like that. I think that if the process of emigration
to the west is normal and open, than many people might
help the country and come back. It’s a reality; what can
you do?

QUESTION: You spoke about the experience, what
you learned or the limitations to the applicability of
Poland and Hungary. So I raise that other country that is
more like yours: Yugoslavia. What did you lear from
the experience of Yugoslavia? What would you do to
make the Soviet outcome different from that sad South
Slavic state?

The Harriman Institute Forum

SHATALIN: The country which has conditions most
similar to ours is Yugoslavia. I don’t know if any of its
republics have made a declaration of full political and
economic independence yet. So I think our problems are
even more complicated. Also our problems are more
difficult to solve because, for a long time, Yugoslavia has
carefully studied a series of different ways of managing
the economy. You can, of course, learn from Yugoslavia;
in particular how they were able to resurrect a convertible
dinar. However, the fact is that despite a superficial
resemblence, Yugoslavia is a very different case in many
respects. Where the system benefits and what provides
for organizational normality is a work ethic. That is
something we need to recreate, because over the years
our work ethic has vanished. The last point about Yugos-
lavia is the preparedness of the population to see through
aradical policy, which is on a greater order of magnitude
than in the Soviet Union.

QUESTION: If you would, please elaborate a bit more
on the plans for the health care system. You mentioned
that there would be parallel services offered. I fear that
this is a kind of economic apartheid coming in the Soviet
Union, especially in the health care system where low
quality or difficult-to-get services will be provided for
free, but a lot of the higher services would probably be
for hard currency.

SHATALIN: This really is a problem. Presently there
is, of course, a parallel system, but the services offered
for pay are very few. There exists the danger of which
you spoke, that paid medical care -- which is considered
of higher quality -- will be only for people with higher
incomes. Therefore, despite the transition to a market
basis for certain medical services, we consider that during
our country’s long recovery we must preserve free health
care. I think that as we move to market relations, this will
put pressure to raise the quality in medical care. Let us
say that you want an operation for free. But if after the
Operation you want a room with a television, you have to
pay. If you don’t want that, it follows that you’ ll be in
worse circumstances but it will be free.

If we adopted the French system of health care, I think
we could have paid education, market conditions for the
producer in health care. The idea is to create a new
system which compensates the work. Those in need of
services receive them practically for free, while those
providing the services are paid in full. It seems to me that
you Can structure it so as to offer free medical care. You
can create a mechanism that offers the consumer free
health care while at the same time compensating the
producer. The problems of health care, education,
science and culture are being discussed in the Supreme
Soviet and in the Presidential Council. We want to make
things so that health care is of higher quality, increasingly

on a market basis for most of the population. But any
difference is substantive.

(Shatalin was asked whether he wanted to go on taking
questions) :

Well, let’s have some more, as many as you like. Just
don’t ask difficult ones. [Laughter]

QUESTION: My question is about the role of foreign
capital. It seems to me that rather than paying off the
budget deficit (as you called it in the speech), what the
USSR could use now is direct investment by corpora-
tions. I’m wondering what your attitude is toward this,
and what is the attitude of the republics?

SHATALIN: Absolutely positive. In three or four
days perhaps, there will be a presidential decree on
foreign investment giving western firms the right to
establish enterprises with one hundred percent foreign
ownership. The Supreme Soviet is already preparing a
law. Its already written and in committee, where they’re
studying the problem of which you spoke. They’re ex-
amining the means by which foreign capital could be
attracted: taxation policy, the possibility to repatriate
profits, to make the position of the western investor at
least no worse than that of a Soviet investor. In the
beginning, conditions for western investors should be
made better than for domestic investors.

I think that there are many opportunities for capital in
our country. There is much which could be used —
timber, metals —- anyway, many many opportunities.
There is much for foreign capital which is able to use
these resources. For instance, some firms are proposing
the heavy exploitation of raw materials, especially gold,
and there are great opportunities for western participation
here. There are many functions for western capital which
could be very helpful for our economy.

There are some who call on us, "Don’t sell off the
country!" But I think that this type of foreign investment
is not selling the country. Instead it is a means to raise
the population’s standard of living and the level of ef-
ficiency in the economy, which you get through this
additional cooperation. We’re not going to sell the Krem-
lin to foreign interests. [Laughter]

QUESTION: How do you believe that once a market
economy is established in the Soviet Union, that attempts
[be made] to preserve a degree of equality and ward off
some of the problems of a market economy and ensure
that all Soviet citizens have the ability to participate to
some degree equally in the new economy?

SHATALIN: Well, that’s a tough question. When we
consider the ability of all citizens to participate in the
market, we must begin from the fact that there now exist
inequalities between different people. For better or
worse, we are trying to distribute goods according to

labor. We think that for people who have no other proper-
ty aside from their labor power, there is the possibility of
wide disparities in income with the introduction of a
market economy.

But you understand, you have to make a choice.
There are two possibilities: Either you have a small pie
divided equally or a large pie divided unequally.
Moreover, we all know that the small piece in the large
pie is bigger than any of the equal pieces in the small pie.
You have to make a choice. Which road do you take?
Taking a small, equally divided pie or making the pie
bigger and the slices more unequal, but with greater
efficiency. I haven’t answered your question about how
everyone will participate in a market economy. For some
people there will be great differences. This is something
which we wanted to account for in our document, in our
program. What was the first part of your question?

QUESTION: Once the market economy is created
what would be the method by which your government
would establish or maintain some degree of equal access
to the economy?

SHATALIN: I’ve answered that question already.

QUESTION: Perhaps the value of management is at
least as important as the stock of capital. So I want to ask
you if you have given any thought to give a portion of
these equity shares of the typical large enterprise that
might be owned by private interests outside the enterprise
to ensure the direction of savings and energetic managers
to run those enterprises?

SHATALIN: We did not figure it out in numerical
terms, but we are very much against what some suggest.
That is, giving the shares to the workers of an enterprise’s
labor collective. I think that this is a very bad idea. It
would put different people in unequal positions solely
based upon which enterprise they happen to work in. I
think that enterprises must sell shares to other people,
including westerners. We need to get the process going,
to deal with the problem of temporary owners of shares.
We want people to own shares for a long period of time
so that they will have a long-run interest in the perfor-
mance of a firm.

QUESTION: My question is more theological than
political. In the New York Times it was reported that you

operate not only according to mathematical calculations.

but also according to astrological ones. [Laughter] First,
is this an accurate report; and second, does Gorbachev
know about this? And if so, what does he think?
[Laughter]

SHATALIN: I gave that interview to my friend at the
Times. I was telling him about the country and he asked
me, "What then does the future hold, far far off?" And I
said "Only the stars know this." [Laughter] By the way,

I do believe in it. I don’t know if Gorbachev reads the
New York Times, but he’s probably been informed about
it. How he feels about this I can’t say, but I can give you
his phone number.

QUESTION: A few days ago on the occasion of
signing the joint communique giving the Republic of
Korea full [diplomatic] relationship, that day the Prime
Minister [of the ROK] said that the historic time of East
and West has finally come to the Far East, and the spirit
of Gorbachev is recognized here. He thinks that
problems between the two countries will be solved, and
in fact [that there will also be] a more concrete develop-
ment of relationships between Japan and the Soviet
Union. Now, how do you see the economic cooperation
and development of relationships between the Soviets
and Korea and with Japan?

SHATALIN: Both?

QUESTION: If you can answer both, please answer
both.

SHATALIN: You know, on October 25th I’m going to
South Korea. I’ll be there until November 10th. I am
therefore interested in relations with Korea. I will say
seriously that despite the fact that we haven’t had
diplomatic relations with South Korea, there have al-
ready been a tremendous amount of contacts with South
Korean representatives figuring out what can be done.
Many organizations have invited me there. I’ll be there
for two weeks and I will see what kind of opportunities
exist. We want.to have excellent relations with South
Korea. And also with the North. [Laughter]

QUESTION: What South Korean businessmen and
people will ask you is what kind of opportunities are
there. That’s why they’re inviting you.

SHATALIN: There are very many projects being
proposed by South Koreans. They are very big, large-
scale projects. There is room for our relations to be on a
grander scale. Taking into account Korea’s finances and
capital, I think there will be economic mutual assistance,
capital... generally there’s a lot of room for effective
cooperation.

QUESTION: In light of the situation that you have
described, about monetary reform and uncertainty about
the future economic prospects and so on, and also in
relation to the fact that power is being devolved to the
fifteen separate republics, is there not a danger that for
the next five hundred days and perhaps even beyond, that
each of these republics will tend to develop in a sort of
autonomous and inward-looking direction? Attempting
to promote self-sufficiency because there’s no money or
convertible currency for which they can get their exports,
and so on? In the future when you want to have a more
closely integrated economy, there might be a situation in

The Harriman Institute Forum

which each of the fifteen republics have built up whole
sectors of industry and other forms of production that are
based on producing only for the local republican market.
Would this not be a problem for the future as it has been
foreseen by yourself and your co-workers? What plans
do you have to deal with that?

SHATALIN: The problem of autarky is now very big.
Republics are now blockading deliveries. They are il-
legally encroaching on the rights of enterprises and are
limiting the cross-border flow of goods, which harms
entrepreneurs. It not very legal. The sole agent of the
market is the free entrepreneur, and no republican barriers
should exist. They cannot attempt it. It turns the people
towards economic banditry.

It seems to me now that on a certain level the republics
will follow a unified policy on budget and monetary
issues. This will go on for about a year and a half. If we
are successful, then I think that people will understand
that its easier to fly together. I’m talking again about the
economic and social problems that exist. If we are not
able to do this, it will be because we lack the economic,
political and intellectual culture needed to make the
transition to a market.

QUESTION: I’m stunned when you say that Mr.
Ryzhkov’s plan and your plan are mutually exclusive.
Do you believe there is room for negotiation for a com-
promise plan, and can a compromise plan stir the Soviet
economy? And following on that, because there will be
a compromise plan does that make aid from the west that
much more urgent? How much aid do you think is
necessary?

SHATALIN: We need one program. It is impossible
to carry out two different programs. I’ve already stated

in our press that the two programs are very difficult to
reconcile. I said to the Financial Times that these two
programs are of two different blood types. If we speak
about both programs, on the one hand ours is for a more
or less free market; normal floating prices; real impor-
tance for the republics; and an understanding that only,
only through the republics can a real economic reform be
implemented. On the other hand, the government’s pro-
gram relies on administrative solutions in these matters
— raise this, lower that. There is a fundamental dif-
ference in approaches and there can therefore be no
compromise. On many individual issues — problems
related to stabilization, the financial system, measures on
the ruble — everyone understands what needs to be done.
But how to do it...

ERICSON: It’s the difference in the underlying ap-
proach that makes them incompatible.

STEPAN: I'd like to thank you for coming. Really,
it’s been an extraordinary opportunity for everyone in the
audience to have an open discussion with you at this
historic moment. Thank you very much.

[Applause]

SHATALIN: When I am in my last battle in the
Supreme Soviet, which is going to adopt some other
program, and they start booing me, I will say, "I was
before another auditorium where they completely dis-
agreed with me. And yet they applauded me heartily."

Thank you.

[Applause]

Transcription and additional translation by Jeff
Zelkowitz

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text of the second annual
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Dmitri Likhachev,
Russian Culture in the Modern World

November 13, 1990